The share price of Australia and New Zealand Banking Group (ASX: ANZ) crashed this morning after the bank revealed that the public prosecutor is intending to lay criminal charges against the bank for cartel conduct.
You can understand why investors are fleeing the stock, but the actions of the Commonwealth Director of Public Prosecutions (CDPP) have two deeper implications that may not yet be obvious to investors.
Shares in ANZ Bank led the big banks lower with a 2.2% drop to $26.61 on the news as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) shed 0.4% due to weak offshore leads.
In contrast, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) are down between 0.8% to 1%.
The news prompts me to wonder if there is a growing appetite to go after the banks in the wake of the Banking Royal Commission. It's particularly noteworthy that the CDPP is not only going after the bank but a bank executive as well (this being ANZ's Group Treasurer Rick Moscati).
I am not suggesting that the CDPP's action is based-off this sentiment but there is clearly strong public support for persecuting badly behaving bankers and financial advisors after the shocking revelations at the Royal Commission.
It's quite unusual for bank executives to be pursued by the law and I think that is probably the point that surprised investors the most in ANZ's market announcement on the matter.
This creates a riskier than normal environment for banks and wealth managers like AMP Limited (ASX: AMP) and IOOF Holding Limited (ASX: IFL) that isn't fully priced into the sector.
The perception of the amount of risks severely impacts on stock valuation through the two most widely used methods to calculate fair value for equities.
Higher risk will prompt analysts to increase the discount rate used in their discounted cash flow model (the bigger the discount, the lower the value), and it will force analysts to change their estimates on where the share price should be relative to sector or historical price-earnings (P/E) ratios.
The second implication affects the entire market as it could change the way companies raise capital. The cartel allegations relate to ANZ's $2.5 billion August 2015 underwritten capital raising.
The proceedings relate to the bank allegedly issuing around 25.5 million shares to the joint-lead managers for the capital raise. This equated to 0.9% of the shares issued under the offer, but this was not disclosed to the market.
The charges involve alleged cartel arrangements relating to the trading of ANZ shares following the placement of ANZ shares to institutional investors.
The Australian Securities and Investments Commission (ASIC) is also investigating the non-disclosure and, on the face of it, such matters would have probably only been dealt with by ASIC in the past.
Issuing of shares to lead managers is a fairly common practice but the charges will certainly force companies to be more careful in how they manage this arrangement.
ANZ claims it complied with the law and will fight the charges, but the bank will not comment further on the matter until formal charges are laid.
If there weren't enough uncertainties created by a potential global trade war, bank investors will need to deal with this added headwind. This isn't a good time to be a bank investor.
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